TRADE
POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT
AND GOVERNMENT SUMMARIES

Thailand:
December 1999

Thailand
appears to be recovering strongly from the past two years
of economic turmoil, but any temptation to delay reforms
should be resisted, says a WTO report. In the first Trade
Policy Review of Thailand since the 1997 financial crash,
the WTO says the Thai economy has benefited from major
reforms which have led to greater transparency, stronger
governance and better prudential supervision, both in the
private sector and in government.

Thailands
reforms point to strong recovery but efforts should
continue, review says

Thailand
appears to be recovering strongly from the past two years
of economic turmoil, but any temptation to delay reforms
should be resisted, says a WTO report. In the first Trade
Policy Review of Thailand since the 1997 financial crash,
the WTO says the Thai economy has benefited from major
reforms which have led to greater transparency, stronger
governance and better prudential supervision, both in the
private sector and in government.

The
report notes that despite the severe recession 
real GDP dropped 12% in 199798 the government
has resisted protectionist pressure. "One of the
most striking aspects of the Governments policy
response to the crisis is its liberalization of
several aspects of its trade and foreign investment
regime in order to speed up structural adjustment,"
the report says.

The
crisis is blamed on weaknesses in the way the financial
and other sections of the corporate sector were governed:
poor accounting practices, lack of transparency in
management, inadequate supervision of banks and financial
institutions. Because company data was in adequate,
financial risks could not be assessed properly. A
seemingly fixed exchange rate régime led operators to
borrow heavily in foreign currencies, precipitating a
financial crisis when the exchange rate collapsed in July
1997. Many of these issues are now being addressed
although further work is needed, the report goes on.

Focusing
on Thailands trade policy, the WTO report welcomes
further streamlining of import and export procedures, and
the continuing trend for tariffs to be reduced even
though some have risen, for example on motor vehicles and
clothing, and some high peaks (for example 80%) remain.
It expresses concern about the lack of a single
publication containing all regular ("MFN") and
preferential import duty rates.

Thailand
has encouraged regional trading partners within the
Association of Southeast Asian Nations (ASEAN), the
Asia-Pacific Economic Cooperation (APEC) forum,
Asia-Europe meetings, South Asia, and the
Greater Mekong region to liberalize faster and
further in the context of regional trading arrangements,
in the conviction that liberalization will assist
economic recovery.

The
report notes that the Thai governments concerns in
the WTO include regret that some of its main exports such
as agri-food and textiles and clothing still face
quantitative restrictions, few of which have been
eliminated. Thailand is active both in the WTO
Agriculture Committee, and in Textiles Monitoring Body.

The
Thai government also favours general ("MFN")
tariff reductions in its export markets over preferential
(Generalized System of Preferences  GSP) schemes
because some of these preferences are withdrawn when a
country becomes more developed or the product enjoying
preferences gains a sufficient share of the market. The
Thai governments view is that the withdrawal of
preferences eventually disrupting Thai exports, the WTO
report notes.

Various
domestic reforms are also underway, the report says.
These include improving government transparency, tougher
measures to deal with corruption and improved integrity
of the customs régime. State-owned enterprises are being
privatized and a 1999 competition law aims to ensure that
these companies do not become private monopolies,
although enterprises which are not privatized are not
covered, the report says. The government is also
reviewing its import-export and investment legislation to
make trading and investment regulations more transparent,
predictable and stable.

The
government has also continued to open up the financial
sector to foreign investment, as part of its efforts to
deal with the financial crisis, the report goes on. New
commitments were made in the WTO financial services
negotiations in December 1997, six months after the
crisis erupted. "These commitments, and in
particular the elimination of the 25% limit on foreign
equity participation, should strengthen the financial
sector by attracting new foreign capital and expertise
and by increasing competition," the report says.

However
it expresses concern about provisions allowing offshore
banking (International Banking Facilities) to operate as
a conduit for domestic borrowing, and whose nature may
have magnified the crisis. "A new Financial
Institution Law is being drafted to consolidate the
supervision of the financial sector and ensure prompt
corrective action, but apparently no amendments to the
International Banking Facilities or associated tax
privileges are envisaged," the report says.

Further
liberalization is also taking place in telecommunications
and transport, but remains to be "bound" within
the framework of the WTOs General Agreement on
Trade in Services (GATS), the report notes.

Thailand
has also modified its intellectual property legislation
in order to implement the WTO TRIPS Agreement  as a
developing country it has to implement this by
1 January 2000. Among the measures taken are an
amended Patent Act (which allows for parallel imports)
and a new Intellectual Property and International Trade
Court. Some problems remain with enforcement, the report
adds, partly because the Thai authorities say they lack
cooperation from right holders in conducting raids or
taking cases to the courts.

Notes
to Editors

trade
policy reviews are an exercise, mandated in the WTO
agreements, in which member countries trade and
related policies are examined and evaluated at regular
intervals. Significant developments which may have an
impact on the global trading system are also monitored.
For each review, two documents are prepared: a policy
statement by the government of the member under review,
and a detailed report written independently by the WTO
Secretariat. These two documents are then discussed by
the WTOs full membership in the Trade Policy Review
Body (TPRB). These documents and the proceedings of the
TPRBs meetings are published shortly afterwards.
Since 1995, when the WTO came into force, services and
trade-related aspects of intellectual property rights
have also been covered.

For
this review, the WTOs Secretariat report, together
with the policy statement prepared by Thailand, will be
discussed by the Trade Policy Review Body on 15 and
17 December 1999. The Secretariat report covers the
development of all aspects of Thailands trade
policies, including domestic laws and regulations, the
institutional framework, trade policies by measure and by
sector.

Attached
to this press release is a summary of the observations in
the Secretariat report. The Secretariat report and the
governments policy statement are available for the
press in the newsroom of the WTO internet site
(www.wto.org). These two documents and the minutes of the
TPRBs discussion and the Chairmans summing
up, will be published in hardback in due course and will
be available from the Secretariat, Centre William
Rappard, 154 rue de Lausanne, 1211 Geneva 21.

The
Secretariats
report: summary

The
principal economic development since Thailands
previous Trade Policy Review in 1995 has been the
financial crisis that erupted in mid-1997. This crisis
manifested itself initially in a sharp depreciation of
the Thai currency (the baht). Real GDP dropped 12% over
the period 19971998 and unemployment rose sharply.
Notwithstanding the severity of the crisis and the
consequent recession, the Thai Government has, by
and large, resisted protectionist pressures, opting
instead for measures aimed at reinforcing its already
increasingly outward-oriented trade and investment
policies so as to foster economic recovery.

Economic
environment

Prior
to 1997, Thailands economic performance had been
outstanding, with real GDP growth averaging almost 9%
annually since 1990. This strong expansion was partly the
outcome of market-oriented structural reforms, undertaken
by successive governments during the 1980s, including
reductions in barriers both to imports and exports, and
the liberalization of the foreign investment regime.
Strong growth of the economy was also greatly helped by
Thailands high saving rate, which averaged more
than one third of GDP throughout the 1990s. Nonetheless,
savings were insufficient to finance domestic investment
and the resulting gap was bridged by inflows of foreign
capital averaging 10% of GDP annually, attracted to
Thailand by prospects of profitable investments and by
its open foreign investment regime. The correspondingly
large and growing current account deficit, together
with the progressive accumulation of public and private
external debt, was not a problem as long as investments
in Thailand were allocated efficiently to projects whose
returns were at least sufficient to cover the cost of
capital. Unfortunately, by 1997 this was no longer
perceived to be the case, leaving the Thai financial
system vulnerable to a sudden loss of confidence, which
led the economy into a severe recession.

This
vulnerability was highlighted when commercial banks
reported a significant increase in non-performing loans
at the end of 1996; in addition, exports declined in
1997, indicating a possible fall in external
competitiveness. There followed a dramatic flight of
capital and heavy losses of foreign reserves, which
culminated in a large depreciation of the Thai baht in
July 1997. In turn, the currency depreciation immediately
translated into heavy losses in corporations
balance sheets because of their high reliance on foreign
debt, and many faced bankruptcy as a consequence. The
outcome of this financial crisis was that real GDP fell
by nearly 2% in 1997 and by over 10% in 1998. Increased
unemployment and falling personal incomes resulted in
many people falling below the poverty line. Hence, the
financial crisis became a full-blown economic crisis of
major proportions with far-reaching social repercussions.

The
origins of this crisis and the resulting deep recession
have been attributed mainly to generalized weaknesses in
the governance of financial institutions and
corporations; these weaknesses included in particular
poor accounting practices and a lack of transparency in
management as well as inadequate supervision of banks and
financial institutions. In the absence of adequate
company data, many investments were not based on accurate
assessments of financial risks. The financial crisis has
thus highlighted the need for a more transparent,
competitive, and rules-based business environment.
Moreover, the maintenance of a fixed nominal exchange
rate until mid-1997, combined with the encouragement of
special offshore banking facilities, led banks and
companies to borrow heavily from abroad in foreign
currencies, mostly on a short-term and unhedged basis, so
as to exploit interest rate differentials, thereby
exposing themselves unduly to the risk of a sharp decline
in the exchange rate.

During
the months immediately following the crisis, the Thai
economy underwent internal and major external
adjustments. A sharp drop in private investment
contributed to a fall in domestic demand and a major
contraction in imports. The current account moved from a
deficit of 8% of GDP in 1996 to a surplus of 12% of GDP
in 1998. A correspondingly large swing also occurred on
the capital account, which moved from net inflows of
nearly US$20 billion to net outflows of nearly
US$10 billion.

In
response to the crisis, the Thai authorities established
a market-based exchange rate system, thereby abandoning
the peg to a basket of currencies. Initially, they also
tightened monetary and fiscal policies to restore
confidence in the economy, but later relaxed both as the
recession turned out to be more severe than anticipated.
Aware of the far-reaching social consequences of the
crisis, the authorities have targeted low-income groups
in recent public expenditure increases. One of the most
striking aspects of the Governments policy response
to the crisis, however, is its liberalization of several
aspects of its trade and foreign investment regime in
order to speed up structural adjustment.

Trade
and foreign investment regime

Thailands
trade and foreign investment policies are aimed at
promoting economic cooperation in international fora and
avoiding frictions with trading partners. Accordingly,
the Thai Government has actively participated in the work
of the WTO, where it has expressed its regret that only a
few quantitative restrictions have been eliminated in
areas of significant export interest to Thailand, notably
agri-food and textiles; it has called for further efforts
to abolish market-access restrictions. Moreover, Thailand
has encouraged regional trading partners within ASEAN,
APEC, Asia-Europe meetings, South Asia, and the
Greater Mekong region to liberalize faster and
further, in the conviction that liberalization will
assist economic recovery. The Government also favours MFN
tariff reductions over GSP schemes because the graduation
mechanisms in some GSP schemes can trigger the
reinstatement of higher MFN tariffs, thereby eventually
disrupting Thai exports.

On
the domestic front, a long-term priority is to ensure
greater government transparency and accountability. A
1997 Constitutional amendment introduces the right of the
Prime Minister to request a referendum, provides for a
National Counter-Corruption Commission and establishes an
independent advisory body in charge of consumer
protection. In addition, the customs authorities have set
up a special task force to create transparency, resolve
complaints, and thereby improve the integrity of the
customs regime.

Economic
infrastructure should also benefit from the planned
privatization of state-owned enterprises; a 1999
competition law is aimed at ensuring that such
enterprises do not become private monopolies in the
privatization process. However, the law does not extend
to those enterprises that will remain state-owned.
Recurrent legislative delays reflect the difficulties
faced by the Government in passing necessary legislation
through Parliament. These difficulties include opposition
to the sale of domestic enterprises to foreign interests.

As
a consequence of legislative delays, after
seven years of parliamentary deliberations, a new
legislative framework for foreign investment has yet to
obtain approval. Meanwhile, conditions for foreign
investment continue to be determined according to the
latest ministerial announcement. The authorities have
also relied on such announcements to implement border tax
changes, regulate trade defence, change the conditions
for export assistance, implement changes in direct and
indirect internal taxes, and amend government procurement
rules. Although use of ministerial announcements has the
advantage of flexibility, it reduces the stability,
predictability, and perhaps the overall coherence of the
trading and investment regime. Accordingly, the
Government is reviewing import-export and investment
legislation to ensure that it reflects the actual
openness of Thailands trading system and provides a
clear and stable framework for business decisions.

Policies
and measures affecting trade and foreign investment

Border
measures

The
Government has continued to streamline actual import and
export measures in order to facilitate international
trade. Thus, for example, the authorities are in the
process of amending the legislation on customs valuation,
which should reduce the incidence of arbitrary
"uplifts". Furthermore, despite complex
licensing legislation, which remains un-notified to the
WTO, Thailand maintains few import licences, quotas, or
other quantitative restrictions on imports. Few trade
defence measures are in place, although a new
Anti-Dumping and Countervailing Duty Act in 1999 replaced
the previous much debated regulations notified to the
WTO. As a result, border measures consist essentially of
tariffs. In this context, the publication of a single and
comprehensive tariff containing MFN and preferential
duties would, as already noted in Thailands 1995
Review, greatly enhance the transparency of the import
regime.

The
trend in tariffs is downwards although rates have
fluctuated since 1995. In September 1999 applied MFN
tariffs averaged 18%, compared with 23% in 1995. But
tariff peaks can be as high as 60%, down from 100% in
1995; they protect domestic producers of agri-food
products, clothing and motor vehicles. The simple average
of bound tariff lines will be 26% for industrial products
and 34% for agri-food products, once the Uruguay Round of
tariff reductions is fully implemented. However, 31% of
national tariff lines covering industrial tariffs are
unbound. Under the 1997 Information Technology Agreement,
Thailand is committed to eliminating MFN duties on
products accounting for approximately one quarter of
total trade. Reductions were due to start in 1999.

Tariff
increases during the period under review have in several
cases caused applied MFN tariff rates to exceed WTO bound
rates, but the authorities note that in such cases MFN
bound rates apply to WTO Members, on condition that
a certificate of origin is provided at Customs. Such
certificates are likely to complicate trading procedures
as does the fact that tariff rates tend to be higher for
non-members than for Members of the WTO.

Thailand
is actively implementing tariff reductions under the
ASEAN Free-Trade Agreement (AFTA). By the year 2000,
Thailands AFTA tariff will slightly exceed 7%, less
than half of the applied MFN rate. This divergence
between MFN and AFTA tariff rates may have contributed to
trade diversion, particularly in an environment of
falling imports and GDP. The share of imports from ASEAN
members in total imports has increased since the last
Review of Thailand in 1995.

The
financial crisis created the concern that bank failures
would deprive producers of access to export finance. The
authorities therefore have greatly expanded the number
and funding of export financing schemes, some of which
involve preferential terms. For example, the value of
exports financed under the Packing Credit Facility
amounted to 10% of total exports in 1998. The authorities
have also taken advantage of transitional provisions
contained in the WTO Agreement on Subsidies and
Countervailing Measures to introduce additional tax
incentives in favour of exports. Generally, however,
Thailand competes on world agri-food and other markets
without any significant export subsidies.

Substantial
progress has been made to expedite the customs clearance
process for exports, as part of an overall strategy to
achieve an export-led recovery. In order to conform with
quantitative restrictions maintained by trading partners,
export quotas are in place on textiles and clothing
products destined for Canada, the European Union, Norway
and the United States; and on cars exported to Chinese
Taipei.

Internal
measures

Numerous
tariff and other tax concessions are intended to
neutralize the effect of relatively high tariffs on
exports, investment, and production. Several of these
measures are administered by the Board of Investment
(BOI), which grants not just tax but also non-tax
incentives, such as the right to own land or to invest in
activities otherwise closed to foreigners. Changes in
incentives may be introduced by
ministerial notification and do not need to be
approved by Parliament, provided they fall under the
purview of the Investment Promotion Act. A number of
incentives have been notified to the WTO as subsidies or
as trade-related investment measures; the authorities
intend to abolish the latter by 1 January 2000.
Overall, investment incentives may have resulted in an
inefficient allocation of capital, as witnessed by the
large number of unprofitable investments, which
contributed to the recent crisis.

Thailand
has modified its intellectual property legislation in
order to implement the WTO Agreement on TRIPS. In
particular, the Patent Act, as amended, introduces the
principle of national treatment and eliminates the
requirement that products under a patent must be
manufactured locally. Parallel imports are considered
necessary to maintain competitive prices of products
protected by intellectual property rights. In 1997, the
Intellectual Property and International Trade Court began
to handle all civil and criminal cases involving
intellectual property. Despite the several steps
taken to improve enforcement, the authorities consider
that, in practice, this remains extremely difficult,
partly because of insufficient cooperation from right
holders in conducting raids or taking cases to the
courts.

The
Thai Industrial Standards Institute has participated
actively in the work of the WTO Committee on
Technical Barriers to Trade; it considers that
harmonization of international standards, transparency,
avoidance of unnecessary obstacles to trade, and
non-discrimination would be beneficial to Thailand as
well as to other developing countries. All new Thai
standards and regulations are now systematically based on
international norms, and conformity assessment procedures
have been greatly simplified in cases where mutual
recognition agreements have been established. Meanwhile,
however, rather stringent food and drug regulations, in
effect, create a system of exclusive importers, as only
one applicant holds the information required for
registration and licensing, thereby preventing parallel
imports of such products.

The
authorities report that Thailands regulations on
government procurement have recently been amended with
the objective of enhancing openness, transparency, and
fair competition. The authorities have indicated that
procuring agencies allow foreign bidders to compete for
contracts unless at least three domestic products meeting
national standards are available. Most domestic products
are given a price preference margin in procurement.
Government contracts for consultancy and engineering
services must be awarded to domestic companies as the
leading firm. All public-sector imports above
US$7 million must have a related countertrade
transaction.

Sectoral
trade policies

Thailand
has continued to participate actively in the work of the
WTO Committee on Agriculture, urging Members to proceed
with tariff reductions and eliminate market-access
restrictions. The authorities report no significant
export subsidies and Thailand has also shown restraint in
the use of domestic subsidies likely to affect trade,
particularly since the recent depreciation of the baht.
Production and trade of several key agri-food products
are organized through marketing boards and other
government-supervised organizations.

High
tariffs protect the domestic meat and dairy, fruit and
vegetable, sugar, beverage and tobacco manufacturing
industries. Thailand does not apply quantitative
restrictions on agri-food imports; many of the tariff
quotas established under the Uruguay Round are not used
in practice to restrict imports; instead, lower or zero
duties are frequently applied when imports of the
products concerned are needed for the domestic processing
industry. For the few products whose importation is
impeded by high tariffs, partners to the AFTA will have
unlimited access to Thailands market as of 2000 at
rates not exceeding 20%, thereby generating substantial
pressure on certain domestic agri-food sectors.

Thailand
has continued to liberalize the energy market and has
undertaken in various international fora to enhance
efficiency through greater competition, including by
majority foreign-owned companies. A transparent
regulatory framework has been announced for the
year 2000 in the petroleum, electricity, and gas
sectors, followed by corporatization and eventual
privatization of selected state-owned enterprises. In the
WTO, Thailand has not bound tariffs on most petroleum
products, and has not included any energy-related sectors
in its GATS Schedule of Commitments.

After
two decades of double-digit growth, Thai manufacturing
was severely affected by the financial crisis that broke
in mid-1997, after which the authorities substantially
increased border taxes on several consumer products. In
particular, tariffs on motor vehicles were raised from
around 40% to 80%. Production capacity has increased in
the automotive sector as new joint ventures with foreign
multinationals have started supplying domestic and export
markets. Investment incentives in the automotive sector,
some of which are due to be amended by 1 January 2000,
include local-content provisions, themselves attached to
end-use provisions, import and excise duty concessions,
and corporate tax exemptions.

The
textile and clothing industry provides an example of the
recent tariff instability in the manufacturing sector,
causing unpredictability for importers. After a
continuous process of tariff reduction from 1994 to 1996,
whereby tariffs on clothing were reduced from 100% to
45%, and then to 10% for some products (in early 1997),
tariffs were raised to 60%, ostensibly on fiscal grounds,
but also to assist crisis-stricken industries: Thailand
does not protect its textile and clothing industry with
import quotas; however, its exports are substantially
restricted by quantitative restrictions and safeguards in
export markets.

In
the course of implementing measures to overcome the
crisis, the Thai Government has continued to open its
financial services sector to foreign investment. Thailand
has made new commitments with respect to insurance,
banking, and other financial services, first in its
Schedule annexed to the Second Protocol to the GATS (the
so-called Interim Agreement) on Financial Services agreed
in July 1995, and then, as a result of the WTO financial
services negotiations concluded in December 1997,
six months after the crisis erupted. These
commitments, and in particular the elimination of the 25%
limit on foreign equity participation, should strengthen
the financial sector by attracting new foreign capital
and expertise and by increasing competition. One possible
area of concern involves the provisions allowing offshore
banking (International Banking Facilities) to operate as
a conduit for domestic borrowing, and whose nature may
have magnified the crisis. A new Financial Institution
Law is being drafted to consolidate the supervision of
the financial sector and ensure prompt corrective action,
but apparently no amendments to the International Banking
Facilities or associated tax privileges are envisaged.

Under
a series of concession contracts with the existing public
duopoly, private companies have progressively entered a
variety of telecommunications markets, creating a
thriving market in certain telecommunications services,
such as mobile phones and Internet services. The
authorities, aware that these markets are unlikely to be
truly competitive in the absence of cost-based pricing,
transparent and fair interconnection arrangements, and
independent regulation, have undertaken to introduce
commitments regarding commercial presence in voice
telephony and other telecommunications services, by 2006,
on the basis of new legislation.

There
have also been developments towards greater international
competition in the transport sector. The main airline is
being partially privatized, and amendments were
introduced in Parliament to allow larger shares of
foreign ownership in domestic airlines and introduce
competition in reservation systems. In 1997, foreigners
were allowed to hold a de facto majority in a company
owning maritime vessels under the Thai flag.

Thailand
included a large number of business services in its GATS
Schedule of Specific Commitments; the current regulatory
framework allows foreign presence essentially through
joint ventures with minority foreign control. In
particular, member firms of the "Big Five"
multinational accountancy networks supply a large share
of domestic audit services under these
joint ventures. Recent analyses of Thailands
crisis have highlighted the lack of transparency and
accountability in corporate management and auditing
practices, leading the authorities to revise all Thai
accounting standards, and require companies to apply
international accounting standards, as well as establish
an audit committee to oversee companies financial
reporting process and disclosure. Market access
restrictions, including nationality and equity
requirements, undoubtedly contributed to the severity of
the crisis.

Outlook

The
main macroeconomic indicators suggest that Thailand is
recovering strongly from the economic turmoil of the past
two years. Major reforms, resulting in greater
transparency, and strengthened governance and prudential
supervision, have underpinned the recovery by improving
consumer and investor confidence, both domestically and
abroad. Trading partners too have played a key role in
the recovery, aided by Thailands welcoming and
liberal business environment, providing greater
efficiency through import competition and direct
investment inflows. They have also kept their markets
open to Thailands exports.

There
are still a number of downside risks, however. For
example, the continuing need for corporate debt
restructuring, reflected in the high level of
non-performing loans, could hamper the recovery of
private investment. More broadly, the danger remains that
as the recovery gains pace, the Government might succumb
to pressures to put off fundamental reforms, which
although currently well under way, are still incomplete
and yet essential for the achievement of a stable basis
for sustainable and equitable growth of the Thai economy.